Crunch those numbers

Jan 26 2011 21:47
Marc Ashton

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WHENEVER African Bank Investments [JSE:ABL] CEO Leon Kirkinis addresses shareholders and investors, he talks about the "levers" within the group.
Simplistically put, these are the areas which can be tweaked during different economic cycles to get the maximum return from the loan book. Different sets of circumstances such as interest rates, consumer demand on various product lines and bad debt defaults mean Abil needs constant assessment of its mix to generate a profit.
What I find interesting though is how few people who run small businesses have the same appreciation for numbers, either in their businesses or in their personal capacity.
I'll be the first to stick my hand up and say I am guilty. I am one of those people who commits to spending before working out if I am going to have the cash flow to sustain it. I guess in some ways I am like a lot of entrepreneurs, an optimist who hopes that things will just work out.
Having said that, I suppose that is the reason why 90% of small businesses go bust and leave a trail of broken dreams behind them.
However, I started noticing a trend coming through when we were doing the interviews for the Ernst & Young entrepreneur of the year awards. This was the prevalence of accountants among the finalists. Bean counters are entrepreneurs - surely that is counter-intuitive?
The more I thought about it, the more I realised that an appreciation of numbers helped these entrepreneurs work out where the real gaps were and how to exploit them profitably.
Looking around at many of the small businesses we work with, particularly those run by younger entrepreneurs, they follow a pretty predictable pattern.

They start out wanting to offer service X, find they are running out of money and start doing pretty much anything vaguely related for pretty much any kind of income. Then they curse the fact that they never seem to be getting anywhere.
If you don't know what is profitable or generating cash for you, you end up prepared to do any kind of work under the illusion that it's making you money. From there it is impossible to grow any scale without increasing the hours you are putting in.
If this is sounding vaguely familiar, stop what you're doing, grab an Excel spreadsheet and start trying to work out what is actually bringing in the money and what isn't.

Once you know this, you know where to concentrate your efforts. Ditto for your expenses.
It sounds simple, but the reality is that many South Africans in their personal and business finances can't tell you whether they make more money than they spend in a month.
Make a note of when you earn or spend something, and you will empower yourself significantly. A banker I know took to carrying around a little notebook, where he would staple in the slips from daily purchases or write down what he had spent.

Dog food dilemma

He quickly worked out that was on track to spend R7 000 a year on coffee at the office canteen. No prizes for guessing which habit got kicked.
I am a big believer in people remembering the simplest examples. I thought I would sign off this week with one I picked up from business coach Brad Sugars at a presentation last year.
Brad was doing some consulting for a dog food manufacturer with dwindling sales, who brought him in to work out how to reinvigorate the sales process.

After a bit of investigation, they worked out that one of the big reasons people stopped buying dog food was pretty simple - their dogs got old and died.

The solution was simple. If your dog died and you were part of the dog food manufacturer's loyalty programme, he would buy you a new one. If you could be upgraded from a Maltese poodle to a Rottweiler at the same time, that was a bonus.
For me that is a classic use of understanding numbers. If you know that it is worth your while to buy somebody a new dog so that they will keep using your dog food, you have given yourself a huge competitive advantage.
Do you know your business levers? If not, why not?
 - Fin24

business  |  entrepreneurship



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